Pre-Feasibility Study€¦ · Pre-Feasibility Study SOFTWARE HOUSE Small and Medium Enterprise Development Authority Government of Pakistan HEAD OFFICE 6 …

Pre-Feasibility Study

SOFTWARE HOUSE

Small and Medium Enterprise Development AuthorityGovernment of Pakistan

www.smeda.org.pk

HEAD OFFICE

6th & 8th Floor LDA Plaza, Egerton Road, Lahore.Tel: (042) 111-111-456Fax: (042) 6304926-7

[email protected]

REGIONAL OFFICE PUNJAB

REGIONAL OFFICE SINDH

REGIONAL OFFICE NWFP

REGIONAL OFFICE BALOCHISTAN

8th Floor LDA Plaza, Egerton Road, Lahore.Tel: (042) 111-111-456Fax: (042) [email protected]

5TH Floor, BahriaComplex II, M.T. Khan Road,

Karachi.Tel: (021) 111-111-456

Fax: (021) [email protected]

Ground FloorState Life Building

The Mall, Peshawar.Tel: (091) 9213046-47


Bungalow No. 15-AChaman Housing Scheme

Airport Road, Quetta.Tel: (081) 831623, 831702


May, 2006

Pre-feasibility Study Software House

1

EXECUTIVE SUMMARY..................................................................................................................... 4

1 INTRODUCTION......................................................................................................................... 6

2 INFORMATION TECHNOLOGY............................................................................................... 7

2.1 SOFTWARE INDUSTRY ............................................................................................................. 72.2 HARDWARE INDUSTRY ............................................................................................................ 92.3 COMMUNICATION AND SERVICE INDUSTRY ............................................................................ 10

3 SOFTWARE INDUSTRY........................................................................................................... 11

3.1 CLASSIFICATION OF INDUSTRY .............................................................................................. 123.1.1 Product/Service Base....................................................................................................... 123.1.2 Market Base .................................................................................................................... 13

3.2 PROSPECTS, INCENTIVES AND POTENTIAL OF INDUSTRY ......................................................... 153.3 BUSINESS NEED ASSESSMENT ............................................................................................... 17

4 STANDARDS APPLICABLE TO INDUSTRY.......................................................................... 18

4.1 INFORMATION SECURITY MANAGEMENT SYSTEM (BS 7799) .................................................. 184.2 QUALITY CERTIFICATION PROGRAMS @ PSEB ...................................................................... 18

4.2.1 ISO 9001-2000 ................................................................................................................ 184.2.2 Capability Maturity Model Integration (CMMI) ............................................................... 194.2.3 Customer Operations Performance Center (COPC) ......................................................... 19

5 IT POLICY AND GOVERNMENT REGULATIONS: ............................................................. 20

5.1 IT POLICY............................................................................................................................. 205.2 GOVERNMENT REGULATIONS ................................................................................................ 225.3 INTELLECTUAL PROPERTY RIGHTS......................................................................................... 22

6 MARKET ANALYSIS ................................................................................................................ 23

6.1 MARKET DEMAND ................................................................................................................ 236.2 MARKET SUPPLY .................................................................................................................. 246.3 EXPORT OF SOFTWARE PRODUCT........................................................................................... 246.4 GAP ANALYSIS OR OPPORTUNITIES IN MARKET...................................................................... 25

7 STRATEGIC FACTORS............................................................................................................ 25

7.1 STRATEGIC RECOMMENDATION............................................................................................. 257.2 SUCCESS STRATEGY.............................................................................................................. 257.3 WEAKNESS ........................................................................................................................... 267.4 THREATS .............................................................................................................................. 26

8 PROJECT CONCEPT ................................................................................................................ 26

8.1 TARGET SERVICES OFFERED.................................................................................................. 278.2 FOCUS AREAS....................................................................................................................... 288.3 TECHNICAL EXPERTISE ......................................................................................................... 298.4 FLOW CHART FOR SOFTWARE HOUSE .................................................................................... 298.5 MARKETING STRATEGY ........................................................................................................ 30

9 RATIONALE & JUSTIFICATION............................................................................................ 31

10 THE PROJECT AND THE BASIS OF PROJECTIONS........................................................... 31

10.1 PROJECT COST ...................................................................................................................... 3110.2 PROJECT FINANCING ............................................................................................................. 3110.3 PROJECT VIABILITY .............................................................................................................. 3210.4 PROJECT DETAIL................................................................................................................... 3210.5 REVENUE ASSUMPTIONS ....................................................................................................... 34


2

11 FINANCIAL PROJECTIONS.................................................................................................... 38

11.1 PROJECTED BALANCE SHEET ................................................................................................. 3811.2 PROJECTED INCOME STATEMENT........................................................................................... 4011.3 PROJECTED CASH FLOW STATEMENT..................................................................................... 41

12 ANNEXURES.............................................................................................................................. 43

12.1 ANNEXURE # 1 PROJECT COST AND MEANS OF FINANCING ................................................... 4312.2 ANNEXURE # 2 REVENUE..................................................................................................... 44


PREF-93/May, 2006/ Rev 1 3

DISCLAIMER

The purpose and scope of this information memorandum is to introduce the subject matter

and provide a general idea and information on the said area. All the material included in this

document is based on data/information gathered from various sources and is based on certain

assumptions. Although, due care and diligence has been taken to compile this document, the

contained information may vary due to any change in any of the concerned factors, and the

actual results may differ substantially from the presented information. SMEDA does not

assume any liability for any financial or other loss resulting from this memorandum in

consequence of undertaking this activity. The prospective user of this memorandum is

encouraged to carry out additional diligence and gather any information he/she feels

necessary for making an informed decision.

For more information on services offered by SMEDA, please contact our website: www.smeda.org.pk

DOCUMENT CONTROL

Document No. PREF-93

Prepared by SMEDA-Punjab

Issue Date May 2006

Issued by Library Officer


PREF-93/May, 2006/ Rev 1 4

EEXXEECCUUTTIIVVEE SSUUMMMMAARRYY

Pakistan’s economic recovery has gained further traction during the fiscal year 2004-05. The Real GDP grew by 8.4 percent in 2004-05 as against 6.4 percent last year and surpassed the target (6.6%) for the year by a wide margin. In service sector export relating to IT and IT enabled services (ITeS) during 2004-2005 accounted for US$ 48.50 million, which is transacted through the State Bank of Pakistan. Whereas the export target for current fiscal year that is 2005-2006 are made for US$ 72.00 million.

Information Technology (IT) is revolutionizing the way, in which we work in evolving business climate. Pakistan is rich in human resource, which constitutes the foundation for any major IT initiative. The technology has emerged as fastest growing sector in Pakistan. During last 10 years, Pakistan has been developing human capital and infrastructure to cope with rapidly advancing IT world.

IT Sector in Pakistan can be categorized in three-sub sectors: Software, Hardware and Communication & Service Industry. Pakistan’s software industry widely seen as “great enabler” that provides an opportunity to play a greater economic role in the fast globalizing world. According to conservative estimates, there are about 350-500 software houses in Pakistan working in local and export market in areas of database management, internet applications, CAD/CAM management system etc.

The software industry can be categorized on the basis of products/ services and market. On product/services basis the industry is focusing on product only, services only and hybrid operations that are both product and services including changes in existing products. On market basis the industry can be categorized as Domestic Focused Local Firms, Export Focused Local Firms, Export Focused Foreign Firms and Dedicated Development Center.

The ability of Pakistan to produce quality software is based on our abundant pool of IT professionals. Pakistan is producing about 5,500 IT graduates annually but there is need to utilize their potential and facilitate their innovations. The online services with unmatched security and superior customer satisfaction are required to enhance market and open new horizon for the sector.

There are only 100 business-to-business (B2B) users in Pakistan compared to 75,000 in Hong Kong, which is top of the list. The business-to-consumer volume is greater but no statistics are available. Just how low narrow the base of B2B business is evident from the fact that the number of B2B users in Sri Lanka is ten-times to Pakistan. Iran has a same number of B2B users it enjoys a better rating than Pakistan as far as infrastructure readiness, awareness/education and investment in the e-commerce is concerned.

As the global IT and IT-enabled services (IT/ITeS) industry matures, quality certifications are becoming critical to success of products and services. PSEB has developed an especially designed incentives program to assist IT/ITeS companies in Pakistan forsecuring these certifications. ISO 9001-2000 Capability Maturity Model Integration (CMMI) Customer Operations Performance Center (COPC)

The Government of Pakistan has provided several incentives to investors for promoting the IT industry in the country. The government has designed IT policy and regulations for the promotion of Information Technology. The Focus areas of Pakistan IT Policy are: Human Resource (HR) Development, Infrastructure Development, Software Development, Hardware Industry Development, Internet Incentives, IT Promotion & Awareness, IT Usage Legislation, Regulations etc.


PREF-93/May, 2006/ Rev 1 5

The market demand-supply is moving upward due to fact that country’s financial market and IT Professionals have increasing connectivity. Pakistan’s market demand can be viewed by last year growth at around 37% in revenue and 27% in terms of employment. There are mushroom software houses and individuals working and meeting the market demand in disciplined and undisciplined manners.

The project has concept of export oriented software development house with corporate presence in Lahore, Pakistan and target market at International region major in USA or UK to utilize the cutting edge technology and offer full range of business application solutions for the corporate, financial and industrial sectors. The project is based on Consultancy, Prototyping, Design, Coding and Quality Assurance, Customer Support, Customer Training and User Documentation services to its clients

The focusing areas will be Financial and Capital Markets, Brokerage, Share Registry System, Consultancy for Security, Operations, Performance and Reliability of the System, Database, Network, and Stock Trading software. Services and Trading-Internet Billing and Customer Care System, Activity Monitor- E-Commerce, Engineering and Manufacturing Industry.

The proposed software house preferably be located in Lahore where strong infrastructure along with power, water, fuel and transportation is easily available for the smooth operation.

The estimated cost of the project is Rs.12.41 million. The project shall be financed through equity contribution of 50% by Equity Contributor-Private investors and 50% by Bank Loan. The project will be run by qualified professionals.

Based on the projected financial statements, the returns on the project are satisfactory. Financial ratios of the project is as follows:

(Rs. In Million)Year 1 2 3 4 5 6 7 8 9 10

Net Sales 16.69 27.54 38.20 45.75 50.32 64.87 69.31 69.31 77.95 87.93 Operating Profit (2.59) 2.44 5.97 7.94 7.48 33.44 31.23 24.43 22.76 23.98 Profit before Tax (3.64) 1.48 5.34 7.40 7.02 33.06 30.93 24.21 22.62 23.92 Net Profit After Tax (3.73) 1.35 4.78 4.86 4.82 24.59 24.71 18.45 16.23 17.96

Internal rate of return – on project cost 37.8 %

Payback period – based on cash inflows 5 Years and 0 month

Year 1 2 3 4 5 6 7 8 9 10Operating Profit -15.5% 8.9% 15.6% 17.4% 14.9% 51.5% 45.1% 35.3% 29.2% 27.3%Pre-Tax Profit -21.8% 5.4% 14.0% 16.2% 14.0% 51.0% 44.6% 34.9% 29.0% 27.2%After Tax Profit -22.3% 4.9% 12.5% 10.6% 9.6% 37.9% 35.6% 26.6% 20.8% 20.4%Earning Per Share (6.01)Rs. 0.22Rs. 0.77Rs. 0.78Rs. 0.78Rs. 3.96Rs. 3.98Rs. 2.97Rs. 2.62Rs. 2.90Rs.


PREF-93/May, 2006/ Rev 1 6

11 IINNTTRROODDUUCCTTIIOONN

Pakistan’s economic recovery has gained further traction during the fiscal year 2004-05. The exceptionally strong growth was strengthened by accommodative macroeconomic policies, growing domestic demand, renewed confidence of private sector, fiscal discipline and competitive exchange rates. During the year 2004-2005 Pakistan’s economy extended in all three major components namely, agriculture, manufacturing and services. The Real GDP grew by 8.4 percent in 2004-05 as against 6.4 percent last year and surpassed the target (6.6%) for the year by a wide margin. The growth in year 2004-2005 is supported by a healthy performance in large-scale manufacturing (15.4%), impressive recovery in agriculture (7.5%) and a strong growth in services sector (7.9%).

Service sector is one of the major contributor of country’s growth, grew by 7.9 percent in 2004-05 aided by remarkable growth in finance and banking sector (21.8%), wholesale and retail trade (12.0%); and a modest growth in transport and communication (5.6%). The per capita income in dollars has grown at an average rate of 13.5 percent per annum during the last three years rising from $ 579 in 2002-03 to $ 657 in 2003-04 and further to $ 736 in 2004-05.

Exports were targeted to grow by 11.3 percent in 2004-05 rising from $12.3 billion last year to $13.7 billion this year, thereby registering an increase of $1.3 billion in absolute terms. One-half of the net increase in exports amounting to $651 million has come from the non-traditional exports items, followed by 27 percent from other manufactures and 13.4 percent from primary commodities exports.1

On a monthly basis, exports increased by 35 percent to a provisional $1.5 billion in September 2005 from $1.1 billion during the same month last year. The unexpected growth was because the government has asked exporters to dispose off all the duty-paid stocks before 30th September.2

In service sector export relating to IT and IT enabled services (ITeS) during 2004-2005 accounted for US$ 48.50 million, which is transacted through the State Bank of Pakistan. Whereas the export target for current fiscal year that is 2005-2006 are made for US $ 72.00 million3.

Surpassing the half-year target with application of structural reforms, the Central Board of Revenue (CBR) collected Rs 322 billion as revenue in July-December (2005-06) period, against the target of Rs 308.6 billion, reflecting an increase of Rs 13.4 billion. In last year it was Rs 262.5 billion, with a net growth of 22.7 percent (Rs 59.5 billion)4

Trends show that economies where services contribute over 60 percent to the GDP enjoy a high per capita income of over $ 20,000. In the US, services sector contribute 77 per cent to the GDP compared to agriculture, which though immense contribute just 2 per cent while manufacturing and others contribute the rest of 21 per cent.

1 Economic Survey 2004 -20052 SBP’s Annual Report FY 053 Pakistan Software Export Board4 CBR Report Jan 05, 2006


PREF-93/May, 2006/ Rev 1 7

22 IINNFFOORRMMAATTIIOONN TTEECCHHNNOOLLOOGGYY

Information Technology (IT) is revolutionizing the way, in which we work in evolving business climate. In a short period of three decades, computer science has developed from branch of electronics to one of the largest engineering disciplines itself. The reason for the rapid growth in the demand for software development is lead by the widespread use of computers in everyday life, evolution of high-powered general-purpose computers and low cost of maintaining, debugging of software products. The potential in the field of software development is still growing worldwide.

Pakistan is rich in human resource, which constitutes the foundation for any major IT initiative. The technology has emerged as fastest growing sector in Pakistan. During last 10 years, Pakistan has been developing human capital and infrastructure to cope with rapidly advancing IT world. The Government is fully aware of IT being the driving force in the new millennium. Presently, IT industry is in take off stage and catching up with regional and global industry. Pakistan is also sharing internationally in IT. Pakistan is in best position to take on the challenges in the global market. IT Sector in Pakistan can be categorized in three sub sectors:

Software Industry Hardware Industry Communication and Service Industry

2.1 Software Industry

Pakistan’s software industry widely seen as “great enabler” that provides an opportunity to play a greater economic role in the fast globalizing world. According to conservative estimates, there are about 350-500 software houses working local and export market in areas of Database management, Internet applications, CAD/CAM management system etc.

A detail survey of Pakistan software market based on top leading 60 software houses representing the total software market. It shows that there are over 4,000 technical and professional employees with an average of 66 employees in an organization. Out of these software houses 32% of the software companies reporting annual revenues of more than a million dollar with some reporting more then $5M, another 36% between $200K and $1M, and the rest 32% less than $200K. On the whole these companies had experienced an employment growth of about 27.5% and a revenue growth of 37.4 % over last year.

These companies derive their revenues from export and domestic markets in a ratio of 60:40. On the exports side, they derive 22.5% revenues from products and 38.5% revenues from services. The majority of the product-exports are “customized” rather than “shrink-wrapped” products. On the domestic side, however, the ratios are somewhat reversed with products and services contributing 23% and 16.5% respectively. The industry is serving the private sector markets with around 85% of the total sales going to private sector (local and foreign combined) and the rest going to public sector, equally divided between domestic and foreign5.

5 PSEB-Pakistan Software Industry


PREF-93/May, 2006/ Rev 1 8

Currently a few software companies have either ISO 9000 or CMM certifications most of the companies has dedicated quality assurance team and this number is planned to increase. Presently some of the facts about Software Industry in Pakistan are as follows6:

Table 1: Statistics of IT Industry

Total No of IT companies working in Pakistan

500 (Registered PSEB Members)

Number of substantial IT companies 335 (Active PSEB Members) Number of companies ISO certified 70 with another 30 due to be certified by

June 2005 Number of companies Capability MaturityModel (CMM) Assessed

One CMM Level 5 company, One Level 4. Another five ready for assessment at CMM Level 3 by March 2006

IT & IT Enabled Services Exports during 2004-2005

US$ 48.50 million (transacted through the State Bank of Pakistan)

Percent growth in Exports 45% over Fiscal Year 2002-2003 Export target for fiscal year 2005-2006 US$ 72 million (State Bank transactions) Annual Software Industry Turnover Around US$ 70-80 million Number of IT graduates produced per year About 5,500 No. of Universities offering IT / CS programs

45

Number of IT Professionals engaged in export oriented software development

About 6000-8000

Number of Call Center agents working for international clients

About 2,500

Total No of IT professionals employed About 75,000 Total IT spending in fiscal year 2003-2004 About US$ 600 million Total amount of space utilized in Software Technology Parks (STPs)

600,000 sq ft

Cost per E-1 connection (2MB) US$ 2000 per month

There is no consolidated information available about Software Industry in Pakistan like other contributing sector of economy i.e. agricultural, Manufacturing or industrial. Federal Bureau of Statistics (FBS) was given the task to conduct census of Pakistan Software Industry in year 2002. It provides benchmark information regarding existing infrastructure of Software Industry, number and category of manpower employed and capabilities of Software houses in generating foreign exchange through software export7

6 Pakistan Software Export Board7 Federal Bureau of Statistics


PREF-93/May, 2006/ Rev 1 9

Table 2: Census of Pakistan Software Industry

Year of Registration/ Organizations

Organization

Year of Registration P@SHANos.

SBPNos.

PSEBNos.

OthersNos.

Total Up to 1995 66 1 4 71996 - 1 13 11997 3 5 12 -1998 4 5 20 61999 11 8 25 52000 24 15 65 72001 18 12 75 13

2.2 Hardware Industry

Computer hardware industry can be defined as design, development, manufacturing and maintenance of all products, components that form building blocks of an IT infrastructure. Computer hardware manufacturing is extremely capital intensive industry. Presently, there is no state of the art hardware manufacturing activity in Pakistan because imported hardware components are available in abundance and on cheaper rates. Especially after the emerging in China as a big computer hardware manufacturer & supplier, the prices of hardware components have been reduced.

In this scenario, the computer hardware manufacturing facility in Pakistan is not currently available and feasible. Mostly the computer vendors are assembling the imported parts and components but some companies like INBOX, RAFFLES, MICRO PAK etc. have developed organized assembly lines and are producing small components like casings of PCs. Following categories included in the scope/definition of hardware industry:-

Computing Devices: Desktop Computing Devices, Servers and Mainframes, Work Stations, Mobile Computing Devices including Hand-held computing devices

Computer Mother Boards and Cards including: Computer Processor, Mother Boards, Mother Board Cards/Chips, Device Interface and Controller Cards

Other Computer peripherals (input/output device): Computer Monitors, Keyboards, Mouse, Digitizers, Pointing Devices, Printers & Plotters, Scanners of all kinds, Multi-Media Kits, Gaming Devices, All kinds of computer output devices.

Computer Networking Products: Hubs, Routers, Networking Switches, Computer Networking Connectors, Fiber Optical Cables and networking accessories like, Connectors, Patch Panels, Back Boards, Wiring Block, Surface Mount Boxes

Power Suppliers for Computing Devices: Switch Board Power Supply, Uninterrupted Power Supply (UPS)

Storage Devices Including: Magnetic Hard Disk Drives with Controllers, Floppy Disk Drives, CD Rom Drives/CD Read-Write Drives, Digital Versatile Drives (DVDs), Back Up Devices like Tape, DLT, ZIP, RAID Drives etc.


PREF-93/May, 2006/ Rev 1 10

Consumables: Floppy Disks, Writable/Re-writable CDs, Backup Media like Magnetic Tapes, Optical Devices, ZIP/ZAP Disks, Toners/Ink Cartridges/Ink for computer output Devices

Computer Communication Equipment: Multiplexers, Modems including Cable Modems, Wireless Datacom Equipment – including Set top boxes for Video and Digital Signaling, Computer Interface Equipment with the Hand-Held Devices like Pagers, Mobile Cellular Phones etc.

2.3 Communication and Service Industry

Pakistan IT industry equipped with modern and rapidly expanding telecommunication system with highly skilled and economical work force. Total 1900 cities/towns/villages have been provided Internet facility and total telephone lines installed by March 2005 were 5.5 million as against 4.4 million up to June 2004 last year.8 Pakistan’s Tele industry is growing at a reasonable steady pace since last decade. PTCL is playing a leading role in promoting telecommunication sector in the country. Its achievements are significant in last three years. It added about one million new fixed lines and established Ufone, a new GSM company.

Table below summarizes the major telecom economic indicators9.

Table 3: Telecom Economic Indicator

Sector Status 2001-02 2002-03 2003-04 2004-05Telecom Sector Share in GDP (%)

1.6 1.7 1.7 1.9

GST/CED Collection from Telecom Sector (Rs. In billion)

8.9 11.5 12.1 20.5

Foreign Direct Investment US $ million

484.7 798 979.9 1524

Percentage Contribution in FDI

1.26 1.69 21.13 32.44

Teledensity in Percentage (Mobile + Fixed line)

3.66 4.31 6.25 July12.76

Aug13.67

Oct15.66

Nov16.47

There are numbers of down stream manufacturing industries, which support telecom sector. Pakistan is self sufficient in the context of manufacturing of digital switching, transmission and fiber optic cables. Three digital switching production units (TIP, APL and ZTE) with annual capacity of over 600,000 lines using European and Chinese technology meet domestic telecom industry requirements. In Pakistan approx. 250 ISP’s operating in major cities as well as remote areas, 10,000 computer science graduates being produced annually.

The communication and its enabled services in this sector include; Communication Services through VSAT & ISDN, Internet Service Providers (ISP’s), E-Commerce/E-Business

8 Economic Survey 2004-20059 PTA-Telecom Economic Indicators


PREF-93/May, 2006/ Rev 1 11

Services, Electronic Data Interchange, Video Conferencing, Medical Transcription, Call Centers, Back Office Operations like Revenue Accounting Data Entry, Data Conversion etc.

33 SSOOFFTTWWAARREE IINNDDUUSSTTRRYY

Pakistan’s First Company opened its office in Lahore in 1976 with the name of Systems Pvt. Ltd. Over the last three decades, the industry has grown from zero to an approximate size of well-over a hundred million dollars and employs thousands of professionals. World wide there are 4-tired taxonomies on which tired-1 countries having more then a billion-dollars of export revenues, and the industry maturity of more then 15 years. Tired-2 countries having export revenues of more then $200 million and 10 years of industry maturity. Tired-3 country having more then $25 million in exports revenue and over 5 years of industry maturity. All others aspirants that do not make the cut fall in the tier-4 of the taxonomy.

Currently Pakistan is viewed as a tier-3 country in a widely quoted taxonomy of software exporting nations. In global pecking order of software exporting nations Russia and China are tier-2 nations and India is a tier-1, whose ambition and progress is toward becoming a “mini (software) superpower” 10.

Due to liberalize IT Policy software industry in Pakistan has developed a lot, a mushroom growth of Software houses have been registered in IT Sector. Information centers at IT parks and Business Advisory Councils are providing business advice, suggestions and recommendations to the software companies to improve their business and attract foreign investment. The salient findings from some of the software studies can be viewed as follows:

PSEB study (2005): This study gives a brief picture of software industry and its potential in the country. According to this study:

The employment growth in software houses is about 27.5%. Average 62 employees work in an organization.

The revenue growth of software houses is 37.4% and the revenue from export and domestic market is at 60:40 ratios. From export they derive22.5% and 38.5% of the revenue from products and services respectively.

There are four kinds of software business. Domestic-Focused Local Firm, Export Focused Local Firm; Export Focused Foreign Firm, Dedicated Development Center.

Per employee revenue potential is around $21,800 per annum. Pakistan is tier-3 country having more then $25 Million in export revenue and over 5

years of industry maturity.

UNCTAD Study (2004): Comprises review of secondary literature in the Pakistani and international contexts. Salient findings of the study are:

Revenues in Export: $12.2M (growth of 84%) and Domestic: $5M (growth of 49%).Current estimate of software exports at about $12 M.Discernable action on only 18 of the 162 (11%) “commitments” of National IT PolicyPakistan 76th of 102 countries in Network Readiness Index.Actual spending under IT Policy 2000 lags allocations, esp. in Exports/E-Commerce.

P@SHA-LUMS Software/IT Study (2002): Sample size was 16 organizations. Asked questionsabout domains, revenue sizes, projects acquisition, HR and quality practices etc. The sample was highly biased towards successful software houses. Salient findings are:

10 Carmel, 2003


PREF-93/May, 2006/ Rev 1 12

Average programmer has the potential of generating $13,000 in exports every year.75% of companies have ISO certification and 7% have CMM certification.Average stay of an IT professional in a company is about 2 years.Of the total employment, 56-58% was programmers, 11% QA professionals.Larger firms (>PKR 25M) employed double the QA professionals on % basis.

CSP-SEARCC Study of ICT Manpower (2000): Total 314 of 441 organizations responded (71% response rate) of which 40.8% were IT suppliers, 14.5% public-sector, and 44.7% private sector end users. 2375 of 5000 IT professionals responded (46% response rate) of which 60.3% worked in development and 39.7% in services. Some salient findings are:

51.3% IT professionals worked in software development while 6.3% in IT Mgmt.IT professionals aged between 25-29 (33%), 20-24 (23%), and 30-34 (19%).Male: Female ratio is 9:1 with proportional representation in jobs incl. IT mgmt.Salary levels: < $3000 p.a. (44%), $3-5000 p.a. (25%), $5-8000 p.a. (14%).85% of organizations report shortage of manpower (34%-extreme, 51%-moderate).Top-5 skills in critical shortage: Applications/systems development, network protocol/typologies, dBase, mobile/wireless comm., and multimedia development.

3.1 Classification of Industry

On the bases of reports and research software industry can be categorized as follow:

Table 4: Classification of Industry

Product /Service Base Market Base Product Focused Domestic-Focused Local Firms

Services Focused Export-Focused Local Firms

Hybrid Operation including -Changes Export-Focused Foreign FirmsIn existing products Dedicated Development Center

3.1.1 Product/Service Base

In term of product/service strategy there are product focused or packaged software companies, software/IT services and software/IT consulting companies working in niche product/service for niche market, product/service applicable to several industries and product /service applicable to an industry vertical.

Product Focused

In Pakistan abundance of product has been developed and successfully working in organizations. But still plenty of potential & room is available to be done in this area. The main products mostly demanded in market are as follows:

Table 5: Potential Areas

Financial Management System Purchase & Inventory Mgt. SystemPayroll/ Supply Chain Mgt. System Fixed Assets Management SystemShare & Portfolio Mgt. System Real-Estate-Property SystemFlagship Product. Hospital Mgt. & Patient Filing System Medical Insurance Plan MOR (Manage Your Own Risks)


PREF-93/May, 2006/ Rev 1 13

PBM (Project Building & Monitoring) SMMT (Software Measurement and Metric Tool)

E-Call , E-Share and E-CRM Solutions in B2C

E-CRM Solutions in B2B, E-DoX, E-FaX , E-College

Services Focused

The second largest focused area is the customized services. Which targeted to implement the standardize software application after some customization. In this category a software house can work on more then one project. Currently in Pakistan not only large companies but also small companies are converting their manual work on computerization. The customize services provided by the software houses are:

Table 6: Customized Services Potential Areas

EPR Solutions & B2C & B2B Business Model- KalPoint

Web Designing and Development

IVR Systems TTI Voice hardware platform mostly for banking sector

Public Map-Geographic Info System

Hybrid operations-Changes in Existing Product

Another area that has potential in Pakistan market is implementation of already developed Standard ERP Solutions like Oracle, SAP-R/3, SAGE and ACCPAC etc. In this area there is very few competition prevailing in local market, along with this positive feature the main problem which a software house can face, is the effects of changing after the implementation of the system. So one should know about all the facts and can handle entire problem. A team equipped with highly motivated and skilled individual can do his best.

3.1.2 Market Base

Another way to classify software industry is solely according to their market orientation i.e.those that are predominantly export-focused, domestic-focused and with a lot of hybrids working in between in both export and domestic markets.

The Export-Focused Local FirmThese firms are owned by Pakistan-based entrepreneurial team (that may or may not have been aided/encouraged by a group of expatriates), but with an explicit purpose of exporting software products or services. Majority of firms are targeting on offshore programming and coding for foreign clients. Although there are some that have taken the products route, their numbers are relatively smaller than those focusing on export of services. Some salient examples of this type of business model in action are: Three sixty Degrees, Post Amazers, Advanced Communications, Makabu, Netsol, and Autosoft Dynamics etc.

The Export-Focused Foreign (Expatriate) FirmThese firms are founded abroad or jointly in Pakistan by a foreign usually an expatriate entrepreneurial team, with an explicit purpose of using Pakistan-based offshore development facility to deliver a product or service demanded by foreign market. This type of business model has been adopted by services and product-focused companies alike. Within both services and products domains, this type of model has been more valuable than Export-


PREF-93/May, 2006/ Rev 1 14

Focused Local Firm model. Some salient examples of this type of business model in action are Elixir Technologies, Etilize Inc., Ultimus, MixIT, TechLogix, Prosol, and Xavor etc.

The Domestic-Focused Local FirmThese firms plan to export its products or services abroad and are merely using the domestic market as a vehicle to gain a track record with real life customers. These Companies first do enough “large” projects fairly quickly in the local market to build a reputable portfolio of customers, to develop a domain expertise, and to migrate effectively from a producer of products/services to a much more sophisticated and quality conscious foreign customer. The more successful of these firms have already begun to look overseas, primarily the Middle Eastern region, for a piece of the export market and have been fairly successful. Some salient examples of this type of business model in action are 2B Technologies, ZRG, TPS, Lumensoft, Yevolve, SI3, Softech Systems, AppXS, and Genesis Solutions etc.

The Domestic-Focused Foreign FirmThe Domestic-Focused Foreign (Expatriate) Firm is almost non-existent for reasons having to do with the small size and lack of maturity of the local market. It does, however, find some expression in the relocation of Pakistani expatriates back to Pakistan with a desire to set up companies that either serve the local—the prime example being SI3 whose expressed purpose is to work on the domestic front—or the export market but who end up doing quite a fair bit of work in the domestic market as well.

Dedicated Offshore Development CenterThere are fairly limited offshore development foreign companies. It is different from the Export-Focused Foreign (Expatriate) Firm in the sense that it is often an “add-on” to an already existing company who’s strategic and managerial processes and controls are quite well-established. It, therefore, does not get an equal say in the long-term vision and strategic direction of its parent. Some salient examples of this type of business model in action are: MetaApps, ITIM Associates, Clickmarks, Trivor Systems, and Strategic Systems International etc.

Table 7 Market Base Business Model

Domestic-Focused

Local Firms

Export-Focused

Local Firm

Export-Focused

Foreign Firm

Dedicated

Development

ZRG Three Sixty Degree Etilize ITIM Associates

TPS Post Amazers Prosol MetaApps

Lumensoft Advanced Comm. Adamsoft Clickmarks

Yevolve Netsol Ultimus Enabling Tech.

2B Technologies Makabu MixIT Trivor System

S13 Autosoft Dynamics Techlogix Strategic System

Softech System Sidaat Hyder

Morshad

Xavor ESP Global

Systems

Genesis Solution Avanza Solution Elixer


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Technologies

Alchemy

Technology

Gonet

AppXS Kalsoft

Oratech JinnTechnologies

Askari Info System Secure network

Acrologix Systems Ltd.

Comcept Progressive System

LMKR Millennium

Software

CARE Cressoft

3.2 Prospects, Incentives and Potential of Industry

The ability of Pakistan to produce quality software is based on our abundant pool of IT professionals. Pakistan is producing about 5,500 IT graduates annually but there is need to utilize their potential and facilitate their innovations. The online services with unmatched security and superior customer satisfaction are required to enhance market and open new horizon for the sector. More opportunities are being open in software markets around the world in USA, UK and the rest of Europe, South Africa, Japan and Australia. A vast potential exist for the local software industry to become affordable force in the global arena. The government is taking all possible measures to spur activities in the IT sector and the framework is now more conductive then ever before for investment in the sector. The strengthening factors, which support the feasible software house, are as follows:

Internet

Pakistan at the time of its inception in 1947 owned a meager telecom base with just 7000 telephone lines. Telecom service was meant just to meet the needs of country administration. The measures taken to promote Internet and software are as follows:

(a) 20-50% reduction on the leased lines for ISPs, and software exporters.(b) Concessions to Schools, universities & institutions for Internet usage.(c) Majors cities of country are connected with fiber optic/digital cross connect system.(d) Segregation of telephone and internet traffic to bring internet away from time metering.(e) Second high capacity fiber optic link commissioned in 1998 (catering 20 new cities).(f) Investment of US$ 35 (M) was made in SEA-ME-WE-III project in July 1999 to

enhance capacity.(g) Investment of US$ 55 (M) was made in SEA-ME-WE-IIII project in September 2003 to

enhance capacity.11

(h) Currently about 100 licenses stand issued out of them 50 are operating the service.(i) Custom duty on the telecom & Internet equipment reduced

11 www.the-south-asian.com


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(j) Waiver granted from 25% CED on leased lines given to license ISPs & Software Exporters.

(k) In year 2004 total 1612 cities including 1091 of Punjab, 202 of Sindh, 209 of N.W.F.P and 110 of Balochistan were connected which now reached at 1900.

E-Commerce

The present government in Pakistan has also recognized the importance of e-commerce and finally getting the attention, which it rightly deserves. Electronic Commerce enhances trade efficiencies by eliminating the delays and cutting the documentation costs by allowing trade partners to exchange transaction data digitally. Though e-commerce is already taking place in Pakistan, and its level is the lowest in the region.

Globally B2B e-commerce constitutes 80 per cent of all electronic trade and requires special infrastructure. A review of the progress report of 14-member Asia Council for the Facilitation of Procedures and Practices for Administration, Commerce and Transport (AFACT), there are only 100 business-to-business (B2B) users in Pakistan compared to 75,000 in Hong Kong, which is top of the list. The business-to-consumer volume is greater but no statistics are available. Just how low narrow the base of B2B is evident from the fact that the number of B2B users in Sri Lanka is ten-times to Pakistan. And though Iran has a same number of B2B users, it enjoys a better rating than Pakistan as far as infrastructure readiness, awareness/education and investment in the e-commerce is concerned. Pakistan is an AFACT member.12

The potential areas for E-commerce are as follow:

Financial sector and particularly, banking is the most ready and also the most promising segment to provide a solid e-commerce base for the country.Economic Commerce for Developing Countries (EC-DC) project for first-class security, trust and services for e-business transactions.Electronic Documentation for Central Board of Revenue and other Government tax authorities.Connectivity to all stakeholders, government and private organizations such as customs, port authorities, traders and banks-to electronically complete the transactions.

Incentives

The Government of Pakistan has provided several incentives to investors for promoting the IT industry in the country. The establishment of a reliable IT infrastructure and the provision of an incentives package are instrumental in the development of the local IT industry. Other benefits provided to the IT companies are in the form of tax holidays for 15 years and 100% foreign equity ownership. Because of these incentives, an increasing number of foreign IT companies have chosen Pakistan for their outsourcing operations. Some of the areas in which the Government is facilitating the private sector companies include:

Information technology parks with low rents, fiber optic connectivity, libraries and conference rooms.Provision of funds for software companies to get ISO-9000 and CMM level certifications.Foreign investors allowed 100% ownership of equity in "IT/ITeS companies"

12 Pakistan Economist


PREF-93/May, 2006/ Rev 1 17

Tax exemption for IT companies till 2016.100% repatriation of profits allowed to IT companies.5% custom duties on import of IT-related equipment.Seven years' tax holiday for Venture Capital funds.The rate of depreciation on computer equipment is 30%.The State Bank of Pakistan (SBP) has allowed the opening of Internet Merchant accounts by banks.Instant, reliable and high-speed connectivity available.Over 85% of telecommunications infrastructure is on fiber optic cables.Internet access is available in over 1900 cities/towns across Pakistan.First country in region to establish DWDM telecommunications infrastructure.Several cellular companies are using digital transmission (GSM and TDMA).The cost of 2 Mbps connection has been lowered to $2000/month.Redundant backup connectivity is available through PTCL for call centers.

13

General Potential

A substantial number of educated unemployed youth with ability to read and write english exist in the country at very cost-effective wage level, whereas Pakistani students studying overseas in computer related subjects can also be approached.A wide range of hardware platform from mainframe-to-mini/micro computers available.Reasonable skills exist in the following areas, Operating System - Windows, Windows 95,98 & 2000, MAC/OS, Novell Netware, Windows NT, UNIX, OS/400, Linux and in programming language C++, Visual Basic, Visual FoxPro, COBOL, RPG, OOP, J++ in RDBMS, Oracle, Informix, DB/2

3.3 Business Need Assessment

Parties in Pakistan should be able to enter into legitimate agreements to buy and sell products and services across the Internet with minimal government involvement or intervention.The government should provide a safe and secure environment and should recognize the unique qualities of the Internet.The government should pursue innovative, liberal and transparent policies pro-actively. The traditional concepts of imports, exports and cross-border trade, their rules and regulations need to be reviewed and adapted to meet a fast changing electronic market place.The government should ensure consistency with international regime, international cooperation and interoperability. These are necessary fore-commerce to thrive.The government should provide incentives to encourage listing of IT companies on the stock exchanges.

13 Pakistan Software Export Board


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44 SSTTAANNDDAARRDDSS AAPPPPLLIICCAABBLLEE TTOO IINNDDUUSSTTRRYY

4.1 Information Security Management System (BS 7799)

The Information Security Management System ensures that company is effectively managing the risks associated with information data systems. Information in all its forms is the very lifeblood of the company, whether it be held on paper, stored electronically, transmitted by postal services or by electronic mail, or spoken verbally one-to-one. All such information is today constantly under threat from many sources.

A comprehensive Information Security Policy should be established within all companies. The standard for Information Security Management System (BS 7799), is rapidly growing because of the importance of the issues regarding confidentiality, integrity, and availability of both corporate and customer information

This System provides a systematic approach to managing sensitive and important company information ensuring that it remains both secure and (where appropriate) confidential. It incorporates people, processes and IT systems. BS 7799 provides the internationally recognized standard for Information Management Systems. Achieving the BS 7799 standard will involve:

Development of an information security policy, identifying companies core information assets.

Carrying out a risk assessment exercise and building ISMS (Information Security Management System).

Training of key staff to ensure its successful implementation.

4.2 Quality Certification Programs @ PSEB

The phenomenon of globalization is not only introducing a new lexicon of business, but it is also seeing traditional boundaries giving way to a world of borderless trade, and increased competition from all quarters. Rapidly changing business scenarios are resulting in quality-conscious customers placing. One of the basic issues faced by any industry is the evaluation of the quality of a finished product. Particularly in the IT/ITeS sector, where quality can be hard to "see" at first, it is becoming increasingly essential that suppliers "show" that they have, indeed, created a quality product.

PSEB has developed an especially designed incentives program to assist IT/ITeS companies in Pakistan interested in securing these certifications. The program aims to provide technical and financial assistance to:

110 IT companies in achieving ISO 9001:2000 certification 35 IT companies in achieving various levels of CMMI 10 IT companies in achieving COPC certification

4.2.1 ISO 9001-2000

The ISO 9001-2000 is a general system of product quality criteria, which focuses on key elements, such as product functionality, reliability, usability, maintainability, portability and efficiency. The ISO 9001-2000 certification supports the customer's buying decision by focusing more on the development process, rather than on the final product itself. This standard supports business decisions such as:


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Do software's requirement specifications adequately reflect the user's requirements?

Does the developed software satisfy user's requirements?

PSEB communicate the industry regarding this certification program through the national press, exhibitions, and bulletins. The majority of available slots have now been filled. The detailed guideline for registration of process can be viewed from PSEB and at HMAconsultants website. www.hmaconsultants.com

4.2.2 Capability Maturity Model Integration (CMMI)

Repeated studies have confirmed that less than 25% of software development projects ever meet their objectives. Extensive research has shown that these time and cost over runs are largely avoidable, because the processes that produce high quality software on time, and on budget, are well-known.

For this purpose to minimize the high frequency of failures in outsourced software development projects, Carnegie Mellon University's Software Engineering Institute has developed the Capability Maturity Model (CMM) to assess a vendor's ability to complete developmental projects within a specified budget and timeframe. The CMM is a collection of best practices grouped into five levels of maturity, specifically developed to help others make measured improvements in their Software Engineering/System Engineering and Project Management capabilities."

Like the ISO 9000 standard, the Capability Maturity Model (CMM) is also a model-based software process improvement approach. PSEB recommends that, for the growing number ofPakistani software and service companies that are already ISO 9000-certified, and are nowhoping to achieve a higher level of process maturity - should consider qualifying for a CMM certification as well.

This model addresses certain fundamental business decisions not supported by the ISO 9000 or other systems of product quality. The CMM enables companies to better serve their customer's interests by providing answers to the customer's decision problems, such as:

Is the supplier able to sustain the reliability of its production?

It also effectively answers internally-focused questions, such as:

How can we improve the reliability of our production? How can we measure the effectiveness of our Project Management Processes?

The primary aim of CMMI is continuous process of improvement, from the individual task level to the corporate level. The detail guideline regarding PSEB’s CMMI initiative, can be viewed at www.hmaconsultants.com

4.2.3 Customer Operations Performance Center (COPC)

The primary objective of this certification program for the Customer Operations Performance Center (COPC) is to develop and drive initiatives that support superior performance within the context of a high customer-centric environment. PSEB bears 75% cost of the COPC certification. The remaining 25% cost is borne by the selected ITeS companies.


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COPC certification is considered to be the de facto international standard for the customer contact center industry. Some of the measurement criteria within this quality system include customer service, customer satisfaction and operational efficiency. Service quality improvement initiatives are developed and implemented in a highly collaborative environment, which includes practitioners from both external and internal Customer Service Providers (CSPs), outsourcers, industry suppliers and other industry experts.

As a result of qualifying for the COPC certification, companies will be able to implement industry best practices and benchmark initiatives, realize major performance improvement in core operational areas, and develop their human resources with a focus on Customer Relationship Management (CRM).

PSEB has been mandated to help 10 IT companies achieve COPC certification.

The registration process for second phase of COPC certification has now been closed. For the sake of completeness, however, the process can be viewed from www.hmaconsultants.com or PSEB’s web site.

55 IITT PPOOLLIICCYY AANNDD GGOOVVEERRNNMMEENNTT RREEGGUULLAATTIIOONNSS::

The government has designed IT policy and regulations for the promotion of Information Technology in the country, which express that ‘the Government shall be the facilitator and enabler to encourage the private sector to drive the development in IT and Telecommunications’.

5.1 IT Policy

The vision of the Policy is to harness the potential of Information Technology as a key contributor to development of Pakistan and the broad-based involvement of the key stakeholders. The Focus areas of Pakistan IT Policy are:

Human Resource (HR) Development for the local IT industry to position as an important player in the international IT market.

Infrastructure Development: For world class-enabling infrastructure and a series of IT Parks and Incubators across the country would be established.

Software development Integrated efforts to develop software industry with focus on exports (in addition to the local market) would be undertaken. This would include encouragement of local software houses in Governmental projects, local content development, Urdu and regional language software development, promotion of software exports through establishment of international marketing network, special bandwidth rates for software exporters, encouraging joint ventures, hiring of international consultants for global business development and fiscal and regulatory incentives for software exporters through state bank of Pakistan.

Hardware Industry Development: Focus on developing the areas that are within Pakistan’s reach, in terms of technology and resources and in which the country could have a competitive advantage which include the waiver of duties and taxes on the hardware, incentives to reduce the cost of raw material and inputs, encourage fund research and


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development in the universities and engineering colleges through faculty chairs, matching grants and focused joint projects.

Internet: To encourage competition, avoidance of un-necessary regulations, provision of low cost, reliable and broadband internet access, universal internet access in the areas connected with the telecom network, free internet access for public sector, universities and support for the development of national internet content.

Incentives: Invest in various fiscal and non-fiscal incentives to nurture, develop, and promote the use of IT in organizations, promotion of venture capital industry financing by the banks and DFIs, creation of investment friendly environment, changes in rules to allow the technology companies to be listed on stock exchanges of Pakistan.

IT Promotion & Awareness: A massive IT promotion and awareness campaign that includes provision of continued support and funds by the Export Promotion Bureau (EPB) for the participation in world IT/computer trade fairs, exchange of delegations, posting of IT specialists in Embassies and Commercial Consulates, promotion of IT use by the head of the government, ministers, and all other key figures.

IT Usage: To embark on an aggressive program to improve efficiency and provide quality services to the citizens of Pakistan, IT would be inducted at all levels of government. Key projects thus launched would include government online, electronic governance project and e-commerce network.

Legislation: To provide protection and enhance the confidence of users, providers, and facilitators of information services, legislation based on the recommendations of the working group comprising. Take actions in the areas of digital signature act, Intellectual property & copyright act and the consumer protection act.

Regulations: Concentrate on regulatory framework to avoid violating policy. It would be ensured that excessive regulations do not stifle industry investment and growth.

Action Plan: It is an integral part of the IT Policy. The action plan provides a framework for implementation of the IT policy which includes priority areas, specific projects that can be conceptualized, formulated, assessed, prioritized and implemented. Eleven working groups in respective areas working on devising IT policy and action plan:

Table 8: Working Groups for IT Policy

i. HR Development, Training and Education

ii. IT in Government and Databases

iii. IT Market Development and Support iv. IT Fiscal Issuesv. Telecomm, Convergence and

Deregulationvi. Cyber Laws, Legislation and IPR

vii. IT and Telecom Manufacture and R&D

viii. Internet

ix. Software Export x. E-Commerce xi. Incentive for IT investment


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5.2 Government Regulations

Custom Duties and Taxes

Government of Pakistan has given tax exemption on the income from export of computer software and related services. As per the 2nd schedule - exemptions and tax concessions of the Income Tax Ordinance Clause 133:

"Income from export of computer software and its related services developed in Pakistan: provided that the exemption under this clause shall not be available after the 30th day of June, 2016."

Import Procedure

Software houses/companies are exempt from customs duties and leviable taxes on import of hardware/software tools, which are not manufactured locally, and to be used for software development and export purposes. Central Board of Revenue (CBR) Notification No. SRO 358 (i)/2002 for a complete list of equipment exempted can be seen in customs import tariff.

Realization of Export Earnings

Pakistan Software Export Board (PSEB) had approached the State Bank of Pakistan (SBP) for evolving a procedure for realization for export earnings by the software houses/companies for export of software. Accordingly, the State Bank of Pakistan has evolved a procedure, and issued Circular No. 2/FEB.1 (51) Software-96 in this regard. A software house/company must be registered with PSEB and the State Bank of Pakistan, in order to realize its earnings and to avail Export Finance/Refinance Scheme.Export Finance/Refinance Scheme

The State Bank of Pakistan had allowed a financing facility under the Export Finance Scheme for export of computer software by the software houses / companies. Exports in such cases are required to be made according to the procedure laid down in Circular No.2/FEB.1 (51) Software-96.

The State Bank of Pakistan has issued Circular No. 23 and laid down the rules and procedures for getting finance / refinance facility for export of software by the software houses/companies. Subsequently State Bank of Pakistan has issued a Circular No.13 of 2000 allowing banks to accept the contract/export order as collateral for bank borrowing under the Export Finance Scheme.

Grant of Work Permits to Foreigners

The Government has decided to simplify procedure for grant of permission to expatriate foreign personnel to work in Pakistan.

5.3 Intellectual Property Rights

Copyright law in Pakistan was governed by the Copyright Ordinance 1962, Copyright (Amendment) Act, 1992 and Copyright (Amendment) Ordinance 2000 which provide protection of Intellectual Property Rights (IPR), whereby Copyright protection originally available to literary, dramatic, musical, artistic, cinematographic and architectural works, books, photographs, newspapers, engravings, lectures, records (defined as "any disc, tape, wire, perforated roll or other device in which sounds are embodied so as to be capable of being reproduced there from, other than a sound track associated with a cinematographic


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work) and sculptures was extended to include computer software, periodicals, video films and all forms of audio-visual works.

PIPRO’s establishment was announced in the 2002-2003 Trade Policy to proactively curb the piracy of various goods in Pakistan. Since 2002, the Federal Government has strictly prohibited the use of pirated software on the nearly 5,000 computers spread throughout its ministries, divisions and departments. Vendors are clearly instructed to quote the rates for registered software only, while floating tender notices or advertisements for the supply of computer hardware. Vigorous discussions are taking place with the global IT companies that supply proprietary software products so that these products are made available in Pakistan at substantially reduced rates. This will in itself be a significant deterrent to the use of pirated software within the private sector.

Private organizations are actively playing their role in enforcing Intellectual Property Rights, particularly within the IT sector. These are very encouraging signs for both local software developers, and international software firms. The Business Software Alliance (BSA) is working closely with the Pakistan Software Houses Association (PASHA) to check piracy and to boost the country’s software export potential. The BSA's toll-free helpline (0800-01234), has proved a highly useful resource for local software developers seeking information regarding copyright protection on software exports from Pakistan, and to combat the threat of its infringement in cyberspace.

66 MMAARRKKEETT AANNAALLYYSSIISS

6.1 Market Demand

The Market demand is moving upward due to the fact that the country’s financial community—the business houses, investors, and business managers—are learning how to manage the IT and the IT professionals are learning how to manage the “business” parts of the IT business. Pakistan’s market demand can be viewed by Last year growth at around 37% in revenue and 27% in terms of technical and professional employment. Another encouraging sign is the increasing number of Pakistani owned foreign firms being located to Pakistan as well as the reverse brain drain caused by returning Pakistani entrepreneurs who see the relatively less competitive and virgin market at home as a tremendous opportunity for setting up a Pakistan based company.

IT industry had been recognized by global IT companies as being a rapidly growing marketplace, and this is reflected by the fact that companies such as Cisco, Motorola, and others have recently set up their corporate offices in the country, to cater for the growing demand.14 Overall IT market size far exceeds expectations, and that the opportunities being created both in the public as well as the private sector indeed were very exciting.

The demand in the market exists for the following solutions and services

Table 9: Market Demand

Financial and Leasing Solutions Banking, ATM Solutions

Inventory, Payroll and Marketing Solutions

Retail Store Systems

14 Ministry of IT


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Mortgages, Portfolio Management Call Center Automations

Health Care Solutions VOIP Billing

Manufacturing and ERP Solutions Traveling and Hotel Management System

Project Management and Business Intelligences

Human Resource Solutions

6.2 Market Supply

As it is mentioned above there are mushroom software houses and individuals working and meeting the market demand in disciplined and undisciplined manners but to analyze the top leading companies we can easily judge the market supply:

Table 10: Market Supply

ZRG – Call Center & Telephony Solutions

Softech Systems–Financial & Trading Systems

TPS – Banking and Switching Solutions

Genesis Solutions–ATMs, Info &Vending Kiosks

Lumensoft – ERP & Inventory Systems

Alchemy Technologies – Risk-Mgmt Solutions

Yevolve– Software for Handheld in Transport/SCM

AppXS – Financial & Trading Systems

2B Technologies – Call Center Solutions

Oratech – Oracle-based Applications

SI3– System Integration & Back-Office Outsourcing

Askari Info Systems – ERP, Financials-Accounting

Acrologix – ERP, Archiving, foreign-language OCR

Comcept – Communications Systems

LMKR – Large DBs, GIS, Petrochemicals etc.

CARE—Telecom Eqpt., ASICs, EDA Tools etc.

Majority of the firms established under the category of Export Focused Local Firm, with a target of exporting services to North America and Western European countries. Their market strategy based on customer acquisition in a foreign market, setting up a foreign marketing presence and understanding the domain and context of a foreign customer. 15

6.3 Export of Software Product

Experience of other countries shows that it is very difficult to achieve success in exporting software unless there is a big domestic market. Some of the local firms have already succeeded in exporting software, although the total amount is not very large. one firm has been producing CDs with searchable database for Latin American clients and US. CAD conversion work and web page design work are also being undertaken.

A leading firm has a contract with a Saudi Arabian Bank for supplying and installing a banking software package. Taking advantage of the considerable number of COBOL programmers who were trained in the sixties and seventies, some firms are

15 PSEB-Software Industry Report


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doing work related to the hacking problem. Local firms in partnership with Microsoft are developing ERP software.

Ratios of revenue generation from export and domestic market are 60:40. In export, revenues generate from products and services are 22.55% and 38.55% respectively. Majority of the product-exports are “customized” rather then “shrink-wrapped” products.

6.4 Gap Analysis or Opportunities in Market

The following opportunities are present in IT Sector of Pakistan:

Development of packaged software Quality training and development of specialized human resources Re-engineering and computerization of government/public sector and private sector

organizations installation of network (LANS, WANS, etc) E-information switch over to Urdu as a computer language Reorganization and growth of communications infrastructure Foreign exchange earning potential utilization of available educated human resources

pool unlimited e-commerce potential Global and domestic Internet explosion World-wide growth and lowering of cultural barriers due to the use of the internet and

globalization will drive IT usage Government drive for documentation will provide growth opportunities Entertainment potential of IT and the internet

77 SSTTRRAATTEEGGIICC FFAACCTTOORRSS

7.1 Strategic Recommendation

Main strategic recommendations for the projects are as follow:

Strong technical capabilities and access to high quality managerial talent (e.g. mix of technical and business backgrounds, prior venture experience etc.)

Keeping close interaction with the market demand and requirements. In domestic niche market there is not too much awareness regarding the software’s

and there is need to create awareness in a niche market. Promoting the products in a professional manner etc.

7.2 Success Strategy

Following factors are the key in making the project viable and profitable:

In IT sector the most recent development and make new products with new and different concept make this project successful.

Innovations and ease for clients Research oriented products with low prices and high quality Employee friendly management practices (e.g. flexibility, stock ownership, profit –

sharing etc.)


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7.3 Weakness

The major weaknesses in this field are:

Inability of Pakistani firms to tap and penetrate lucrative foreign markets with international standard at competitive prices

The lack of coherence and co-operation amongst the exporters and the government due to which the problems cannot be effectively addressed and tackled collectively.

The hunger of capable investors to come in fast maturing market of outsourcing and off-shoring services

Lack of awareness in the government administration, bureaucratic hurdles and lack of political will budgetary constraints in government departments.

Lack of cyber law’s implementation. Poor infrastructure facilities such as irregular power supply.

7.4 Threats

The threats identified to the IT industry are as follows:

Serious professionalization and institutionalization deficit including degradation of education standards.

Continued technological backwardness as a result of the refusal of major international IT players to share technology.

Increased use of imported software because of product dumping by international players.

Massive brain drain due to underpaid IT professionals. There are serious shortage of experienced programmers and IT professionals which are necessary for the latest technologies.

88 PPRROOJJEECCTT CCOONNCCEEPPTT

The project has concept of export oriented software development house with corporate presence in Lahore, Pakistan and International market target major in USA or UK to utilizes the cutting edge technology and offer full range of business application solutions for the corporate, financial and industrial sectors. The Project's strategic vision will be provide the clients with quality systems to stimulate their growth in the existing competitive markets. Three important aspects are being considered while developing the project:

1. Robust, and extensible architecture and design2. Good software quality3. On-time delivery

The planning to achieve these objectives required;

Employing a highly professional and experienced staff in all aspects – project management, architecture, design, development and QA

Ensuring continuous personal and professional growth through on-going training Having a well-developed organization structure, and well-defined responsibilities

within the company in order to ensure good teamwork, coordination, and timely product delivery

Providing good customer support and services


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Human Resources

The project should have highly educated and skilled manpower to support its software development operations. Initially 22 technical staff will be hired which is likely to grow to over 60 by the beginning of the next year. The key personnel CEO should have Ph.D. / M.S. degrees from leading universities in USA and UK, and require successfully work on exportsoftware projects with clients in the US and Canada who will provide overall technical and business direction for software development activities.

The Chief Software Architect-CSA, will be strong background in software design and architecture, with special focus on Object-Oriented Design and implementation. His role will be streamlining the software development methodology and life cycle, and software design processes. Validating object designs and acting as technical consultant for team lead and developers.

The majority of technical team would have full command on methods, tools and technology necessary to develop high quality enterprise software systems and would be capable togenerate an idea from scratch, analyze it, form a solution, implement it and then deploy it. Staff should be trained and fully equipped with latest technology and advancement.

Object Oriented Design and Quality Assurance

The quality design is the foundation of a quality product. The key elements for target market will be the assurance of software quality starting from the design phase. Formal Object-Oriented design methodology for tangible benefits to clients including Code Understandability, Reusability, Extensibility, and Maintainability will be followed.

Quality is an attitude - taking pride in the accuracy, correctness and presentation of the software. The QA process has a lifecycle of its own, which runs in parallel with the design/development process. An independent team of trained QA professionals will perform quality assurance at each stage of the software development. It begins when the specifications are delivered, and continues for the entire life of the project.

8.1 Target Services Offered

The project is based on the following comprehensive services to its clients

Consultancy

The project will provide consultancy for solving the client’s software problems, perform customer requirements analysis, and produce comprehensive functional specifications for the software to be developed. This will ensure that the planned software will indeed solve the customer’s problems.

Prototyping

As part of requirement analysis, Rapid prototype of system will be conceived, so that customer can visually see finished system. A prototype will be a rough and dirty system made for demonstration purposes. The final system is well-designed and well-engineered, and is started from scratch.

Design

A formal object-oriented and normalized database will be design for making the systems robust, extensible, and easy to maintain. This document will includes the object model (class diagram), showing the relationships between all classes, the detailed design of each class,


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including details about its attributes and methods, the dynamic model (message sequence diagrams), relationships and attribute data type details, and the data dictionary.

Coding and Quality Assurance

The best coding practices and the highest QA measures will be used to ensure implementation quality. The developers will be trained to follow coding and GUI style guides, and robust coding practices. The project QA team will do test planning, test case generation, for every application to be delivered to the client.

Customer Support

The project services will include on-site, phone, or e-mail support, as per client agreement, in order to ensure solution for any problems while getting started with new systems. Support can be first-level (directly to all end-users) or second-level (to local experts)

Customer Training

The services will also include on-site or off-site customer training of the appropriate duration, depth and difficulty–level, as per client agreement, to ensure start of new systems as quickly and conveniently as possible.

User Documentation

The project will provide comprehensive user documentation, including user manuals, reference manuals, user guides, tutorials, and presentations as per the client agreement.

8.2 Focus Areas

Financial and Capital Markets

Web-based system which provides company and stock market related data and reports, industry related data and macro-economic indicators, fundamental as well as technical stock analysis facilities, and brokerage systems, share registry system and portfolio management facilities for investors.

Consultancy for security, operations, performance, and reliability of the system, database, network, and stock trading software.

Services and Trading

Target on general business and point of sale (POS) systems for services and trading industry.

Manage new connections, equipment orders, invoices, payments, and bill payments at points of sale throughout the country. Manage equipment inventory at main store and all point of sale stores and handle inter-store transfers. Manages country-wide staff payroll.

Internet Billing and Customer Care System Interfaces with dial-in access servers and authentication servers to get usage information, for e-mail account creation, and detail billing according to a complex rate structure.

Activity Monitor Automates the activity forms (or time sheet) processing within an organization using a web enabled application. Fill in by the employees, and are routed to their managers for approval / rejection. Reporting on employee’s time project-wise and activity-wise.

E-Commerce

E-store- An E-Commerce application for superstore retail sales over the internet.


PREF-93/May, 2006/ Rev 1 29

Engineering and Manufacturing Industry

Textile, power and other major industry- Includes General Ledger, Inventory, Payroll, Purchases, Sales, Import/Export, Production, Costing, Fixed Assets, and Executive Information Systems. Links offices and mill sites in four cities through daily dialup data transfer.

8.3 Technical Expertise

The technical team will fully expose to methods, tools and technologies necessary to develop high quality enterprise software systems this will include

Object Oriented Design and Modeling Object Oriented Programming Environments Client/Server Architecture 3-tier Architecture - DCOM CORBA MTS RAD environments Web Applications

The project platform and environment can be as follow

Windows 95/98/NT/2000/XP, as well as UNIX / Linux platforms. C++ including -Visual C++, UNIX and other C++ Java including JDK 1.2.1, Visual Café, IBM Visual Age RAD tools-Visual BASIC, Power builder, Developer 2000 Web Development- VB Script - JavaScript - ASP – IIS, Applets Relational Databases- Oracle, Microsoft SQL Server, Other Relational Databases

8.4 Flow Chart for Software House

•

•

•

Personnel And Administration

Systems And Support

Database Administrator and

Software Architect Consultants

Project Manager(Senior

Team Heads (Analyst / Senior Analyst)

Developers

Office ManagementDevelopment

System Administrator

Other Support Staff

Board of Directors

Chief Executive Officer

Quality Assurance


PREF-93/May, 2006/ Rev 1 30

8.5 Marketing Strategy

If we look the software industry and its various marketing approaches used by software houses and their perception of “successfulness”. The following seven success of marketing strategies used by them;

MS1: Work of Mouth Approach (Client referrals etc) MS2- Advertising in trade local/foreign journals MS3 Attending local/foreign trade conferences MS4 Initiate 1-to-1 communication with potential clients MS5 Use pre established networks/personal relationships MS6 Alliances and agreements with channel partners MS7 Depend on a “Captive” client since formation

Based on the above practicing Marketing Strategy (MS) the proposed Managerial Best Practices (MBP’s) for the project could be as follows:

MBP1-develop effective export-focused operations, to the extent possible, seek a strong expatriate connection (e.g. a founder or co-founder either based abroad or operating equally from home and abroad) and use his/her personal connections and networks to get a “foot-in-the-door” or even acquire first customers.

MBP2-Actively pursue alliances with synergistic entities and off-shoring and marketing relationships with past clients

MBP3-Engage with software multinationals (e.g. Microsoft, IBM, SAP, NCR, Oracle etc.) in development and marketing arrangements.

MBP4-Understand the importance of developing a domain expertise and maintaining a focus. Develop a domain expertise by learning to take the big-picture view of the client’s business operations and look for opportunities to sell business rather than technology solutions. Get domain experts involved, if need be. Avoid the temptation of “on-today-off-tomorrow” type of contracts.

MBP5-Focus on better-developed segments of market. Understand requirements and difficulties in “creating” a market single-handedly and plan accordingly.

MBP6-Sell a business-solution, rather than a technology. Price innovatively. MBP7-Find a strategic first customer who is willing to fund (a part of) the startup and

is “willing and patient” enough to transfer domain knowledge and let you experiment. MBP8-Use the financial clout, domain knowledge, and regional network of locally

operative multi-nationals (MNCs) to fund startup. MBP9-Understand where you need help (e.g. management, marketing, institution

building, legal, accounting) and seek it. MBP10-Do not let the image become the reality. Be creative and innovative about

projecting Pakistan as a responsible country. Persuade your customers and foreignpartners to visit Pakistan and see for themselves.

MBP11-Develop strong domain expertise to lock in customers, move towards value addition to avoid being pressed by the pressures of the commodity business, or continually cut costs by automating your own processes.

MBP12-Counter the shortage of quality labor by hiring expatriate or returning Pakistanis. Hire people with the right attitude, not skill-set or coursework.

MBP13-Know the land, its people and their customs and, to the extent possible, play by its rules. Make use of connections to get your way around. Make use of facilitation agencies e.g. PSEB. BOI, or P@SHA where possible.


PREF-93/May, 2006/ Rev 1 31

99 RRAATTIIOONNAALLEE && JJUUSSTTIIFFIICCAATTIIOONN

Due to the strong potential and rapid growth of the sector, Pakistani Govt. has recognized the need and necessity to promote the industry in all the ways, locally and export. Government took some very rational step in the promotion of IT sector especially exemption of tax up to 2016. Government gives incentives to the IT education as well as software houses. No tax charge on export.

Financial Justification

Based on certain assumptions the financial results of the project have been projected and found satisfactory, as can be observed from the following table:

Sales and Profits

(Rs. in millions)

Year 1 2 3 4 5 6 7 8 9 10Net Sales 16.69 27.54 38.20 45.75 50.32 64.87 69.31 69.31 77.95 87.93 Operating Profit (2.59) 2.44 5.97 7.94 7.48 33.44 31.23 24.43 22.76 23.98 Profit before Tax (3.64) 1.48 5.34 7.40 7.02 33.06 30.93 24.21 22.62 23.92 Net Profit After Tax (3.73) 1.35 4.78 4.86 4.82 24.59 24.71 18.45 16.23 17.96

Ratios & Percentages

Year 1 2 3 4 5 6 7 8 9 10Operating Profit -15.5% 8.9% 15.6% 17.4% 14.9% 51.5% 45.1% 35.3% 29.2% 27.3%Pre-Tax Profit -21.8% 5.4% 14.0% 16.2% 14.0% 51.0% 44.6% 34.9% 29.0% 27.2%After Tax Profit -22.3% 4.9% 12.5% 10.6% 9.6% 37.9% 35.6% 26.6% 20.8% 20.4%Earning Per Share (6.01)Rs. 0.22Rs. 0.77Rs. 0.78Rs. 0.78Rs. 3.96Rs. 3.98Rs. 2.97Rs. 2.62Rs. 2.90Rs.

Based on the above circumstances and figures, it is evident that the project is economical for earning potential.

1100 TTHHEE PPRROOJJEECCTT AANNDD TTHHEE BBAASSIISS OOFF PPRROOJJEECCTTIIOONNSS

10.1 Project Cost

The details of the cost of project are as follows:

RupeesCapital Investment Requirement 10,211,800Working Capital Requirements 2,196,464Total Project Investment Requirement 12,408,264

10.2 Project Financing

The estimated cost of the project is Rs. 12,408,264 including the working capital of Rs. 2.19million. Sponsors will base the project on 50% equity and the Bank Loan will finance the remaining 50%. The proposed equity participation includes:


PREF-93/May, 2006/ Rev 1 32

RupeesDebt @ 50 % 6,204,132Equity @ 50 % 6,204,132Total Project Investment Requirement 12,408,264

10.3 Project Viability

IRR % - age 37.80 %Pay Back Period 5-Years

10.4 Project Detail

Location-Lahore

In Lahore highly maintained available infrastructure area is Gulberg where smooth power and other support is available for every type of business especially for software house. The second best location having strong infrastructure is Defense where power and other facilities are smoothly available.

Computers and Equipment

The Project is based on human capital therefore there is not much high value machinery required for the project. The computer and equipment includes Computers, Laptop PCs, Servers, UPS for PCs, UPS for Servers/Network Equipment, Network etc. The detail list of Computer and equipment is given below

Title Units Unit Cost

Total Cost

PCs 29 25,000 725,000Laptop PCs 2 59,000 118,000Servers 2 156,000 312,000UPS for PCs 31 4,500 139,500UPS for Servers/Network Equipment 2 10,500 21,000Network Equipment 1 100,000 100,000Printer (LASER) 2 18,000 36,000Printer (dot matrix – wide carriage) 2 55,000 110,000Printer-Ink Jet 2 3,500 7,000Software (Servers/PCs – Development Tools, Office and Project Management Tools, Database Tools) 1 1,000,000 1,000,000Modems 4 700 2,800Data Show for On-site Presentations 1 150,000 150,000Power Generator Backup 1 900,000 900,000Miscellaneous 1 100,000 100,000Total 3,721,300


PREF-93/May, 2006/ Rev 1 33

Furniture and Fixture

The list of furniture and fixture is given below.

Items Number Unit Cost Total CostComputer furniture 22 40,000 880,000Office furniture 4 25,000 100,000Furniture CEO 1 80,000 80,000Furniture senior staff 4 50,000 200,000Furniture reception area 1 30,000 30,000Furniture conference room 1 60,000 60,000A/Cs Split 12 25,000 300,000Telephone exchange/phones 1 50,000 50,000Facsimile 1 25,500 25,500Photo Copier 1 100,000 100,000Library (Books) 1 200,000 200,000Miscellaneous 1 150,000 150,000Total 2,175,500

Manpower

As explained above the major item of project is Human Capital. The project requires trained technical staff. The detail list is given below:

Personnel No. Monthly Salary Annual SalaryChief Executive Officer 1 95,000 1,140,000Chief Software Architect 1 60,000 720,000Senior Software Architect 1 45,000 540,000Software Architect 0 35,000 0Senior Analyst 2 30,000 720,000Analyst 4 25,000 1,200,000Database Administrator 2 25,000 600,000Senior Software Engineer 2 25,000 600,000Software Engineers 8 15,000 1,440,000System Administrator (facility management)

2 15,000 360,000

Total 23 370,000 7,320,000

Non-Technical Staff YEAR 1Personnel No. Monthly Salary Annual Salary

Office Manager 1 20,000 240,000HR Manager 1 52,000 624,000Ass. Office Manger 1 7,000 84,000


PREF-93/May, 2006/ Rev 1 34

Receptionist 1 15,000 180,000Accountant 1 52,000 624,000Ass. Accountant 1 15,000 180,000Helpers 2 4,000 96,000Driver 1 5,000 60,000Security Guard 1 4,000 48,000Gardener 1 3,000 36,000Cleaner 1 3,000 36,000Total 12 180,000 2,208,000Total (Technical + Non Technical) 35 550,000 6,669,600

Vehicle

The list of vehicles and other conveyance is given in below

Items Number Unit Cost Total CostCEO 1 1,250,000 1,250,000Chief Software Architect 1 850,000 850,000Senior Software Architect 1 650,000 650,000Software Architect 0 650,000 0HR Manager 1 650,000 650,000Accountant 1 650,000 650,000Motor Cycle 2 58,000 116,000Total 4,166,000GRAND TOTAL 10,062,800

10.5 Revenue Assumptions

Sales-Export & Local

The potential of each employee for revenue is 21,800 US$ p.a. The project is based on Revenue of US$ 12,096 p.a which will increase gradually based on 8 working hours in a day @ US$ 18 per hour with 10% increase upto 5 years and then remains constant and the % of increase in conversion rate is 0%..It is assumed that 300 days will be utilized in full year as working days.

The export local sales ratio is

Year 1 Year 2 Year 3 Year 4 Year 5 : 100 10 : 90 15 : 85 20 : 80 25 : 75

Year 6 Year 7 Year 8 Year 9 Year 1030 : 70 35 : 65 40 : 60 40 : 60 40 : 60

Staff Salary

For every new employed 70% employment has been considered. Whereas the salaries will increase by 15% p.a. Salaries for first year are as follows:


PREF-93/May, 2006/ Rev 1 35

Staff No of Employees Salary Per MonthTechnical Staff 23 370,000

Non Technical 12 180,000

Total Staff 35 550,000

Operating Expenses

Operating Expenses for the project and there basis are taken as follows:

YEAR 1Description Basis Per/ MonthStaff Benefit 5% of Payroll 27,790Bonuses and other Allowances 5% of Payroll 27,790Repair & Maintenance 400 Per person 14,000Insurance 5% of Eqp. Cost 15,505Foreign Traveling (a year) 4 trips @ 350,000 116,667Traveling & Conveyance 4500 Per person 157,500Entertainment 200 Per person 7,000Printing & Stationary 850 Per person 29,750Books & Periodicals 10 Magzines @ 900 9,000General and Administration 400 Per person 14,000Communications Fixed 100,000Rent Fixed 300,000Utilities 1000 Per person 35,000Advertising Fixed 5,000Total 859,002

The year wise details of Operating expenses and staff salaries are given in Annexure.

Inflation Rate

An inflation rate of 10% is assumed while making the projections for operational expenses.

Accounting Depreciation on Assets

Depreciation on the assets has been charged at the following rates for the calculation of profits:

Land ..................................................................................................... 0%Machinery & Equipment .................................................................... 33%Vehicles ............................................................................................. 20%Furniture & Fixture............................................................................. 10%The depreciation on assets is given in Annexure.

Tax Depreciation on Assets

Land ..................................................................................................... 0%Initial.................................................................................................. 50%Machinery & Equipment .................................................................... 30%


PREF-93/May, 2006/ Rev 1 36

Vehicles ............................................................................................. 15%Furniture & Fixture............................................................................. 15%

Amortization of Deferred Expenses

This expense will amortized over first five years.

Preliminary Expenses

Preliminary expenses amounting to Rs.149,000 includes copy right licensing and trade mark charges Rs. 114,000.and other expenses Rs. 35,000 relating to corporate matters.

Taxation

In any year in which company faces the loss only minimum tax liability which is 0.5% will be paid. In next profitable years straight tax rate 35% will be charged.

Working Capital

Our working capital for the first year is 2,196,464 which is also initial working capital. Working capital is calculated on the basis of following assumptions:

Description Days BasisNo of Working days 300 DaysReceivable 40 Sales Advance to Employee 25 Payroll+Benefits Utility Payable 25 One Month BillSalary Payable 25 One Month Bill

Implementation Fee

Implementation fee is based on US$ only first time which is 1,900.

Short term Borrowing

Short term loan from banks based on cash requirement that is one time of total working capital required.

Average Employment

The employment utilization means each employee utilized upto certain percentage for the revenue generation. The direct employment utilization for revenue generation starts from 40% to 70%.

Year 1 Year 2 Year 3 Year 4 Year 540% 60% 60% 60% 60%

Year 6 Year 7 Year 8 Year 9 Year 1065% 65% 65% 65% 70%


PREF-93/May, 2006/ Rev 1 37

Basis for Financial Projections RupeesProject Cost 12,408,264 Total Capital Employed By: %

Equity Contribution by Sponsor 50% 6,204,132 Loan Bank 50% 6,204,132

Licensing FeesImplementation Fees One Time in Us Dollar 1,900$ Short Term Loan Basis of two times Initial Working Capital 2,196,464

Rate Of Interest-Long Term 13%Rate Of Interest-Short Term 12%Inflation Rates 10%Increase in Salary 15%Salary Estimation Based on Salary Survey-

conducted by PSEBAverage Employment 70%Utilization in Percentage Capacity Year 1 Year 2 Year 3 Year 4 Year 5

40% 60% 60% 60% 60%Year 6 Year 7 Year 8 Year 9 Year 10

65% 65% 65% 65% 70%Working Hrs. per day 8 Hourly US $ Rate 18 US Dollar Rate 60.00 Increase in Conversion Rate 0.0%Export Selling Ratio Year 1 Year 2 Year 3 Year 4 Year 5

: 100 10 : 90 15 : 85 20 : 80 25 : 75Year 6 Year 7 Year 8 Year 9 Year 1030 : 70 35 : 65 40 : 60 40 : 60 40 : 60

Depreciation Rates AccountingInitial Subsequent

Equipment 33.0% 50.0% 30.0%Furniture & Fixture 10.0% 0.0% 15.0%Motor Vehicles 20.0% 50.0% 15.0%

Amortization RatesProject develop. Exp 20.0% 20.0%Preliminary Expenses 20.0% 20.0%

No. of days in year 300

Working Capital Basis

Initial Working On Net Working Capital 2,196,464

Current AssetsReceivables Sales 40Advances to Employees Payroll 25

Current LiabilitiesUtilities Payable One Month Bill 25Salaries Payable One Month Salary 25

Tax


PREF-93/May, 2006/ Rev 1 38

1111 FFIINNAANNCCIIAALL PPRROOJJEECCTTIIOONNSS

11.1 Projected Balance Sheet

YEAR Start up Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10

FIXED ASSETS

Tangible 10,062,800 7,784,021 6,720,648 9,119,563 8,746,224 7,850,465 10,913,032 13,297,581 14,590,062 15,664,377 15,491,963

Intangible

10,062,800 7,784,021 6,720,648 9,119,563 8,746,224 7,850,465 10,913,032 13,297,581 14,590,062 15,664,377 15,491,963

DEFERRED COST

Project development expenditure

114,000 91,200 68,400 45,600 22,800 - - - - - -

Preliminary Expenses 35,000 28,000 21,000 14,000 7,000 - - - - -

10,211,800 7,903,221 6,810,048 9,179,163 8,776,024 7,850,465 10,913,032 13,297,581 14,590,062 15,664,377 15,491,963

CURRENT ASSETS

Accounts Recb. 2,225,664 3,672,346 5,093,384 6,099,515 6,709,467 8,649,950 9,241,961 9,241,961 10,393,095 11,723,857

Advances to Employees 555,800 917,700 1,188,872 1,460,040 1,697,411 2,399,549 2,861,256 3,367,585 4,221,452 4,956,688

Cash & Bank Balances 2,196,464 157,494 2,456,776 468,087 3,948,219 8,357,084 26,798,029 47,630,779 63,876,196 76,659,680 92,386,619

2,196,464 2,938,958 7,046,821 6,750,343 11,507,774 16,763,961 37,847,528 59,733,996 76,485,743 91,274,227 109,067,163

LESS: CURRENT LIABILITIES

Short Term Borrowings 2,196,464 2,196,464.0 - - - - - - - -

Utilities Payable 35,000 39,600 58,080 63,888 71,741 103,073 122,238 142,256 175,774 202,784

Salary Payable 550,000 632,500 727,375 836,481 961,953 1,106,246 1,272,183 1,463,011 1,682,463 1,934,832

Dividend Payable - - - - - - - - - - -

0 2,781,464 2,868,564 785,455 900,369 1,033,694 1,209,319 1,394,421

Working Capital 2,196,464 157,494 4,178,257 5,964,888 10,607,405 15,730,266 36,638,209 58,339,575 74,880,476 89,415,990 106,929,548

TOTAL CAPITAL EMPLOYED

12,408,264 8,060,715 10,988,306 15,144,050 19,383,429 23,580,732 47,551,240 71,637,156 89,470,537 105,080,367 122,421,511

SHARE CAPITAL

620,413 Shares @ 6,204,132 6,204,132 6,204,132 6,204,132 6,204,132 6,204,132 6,204,132 6,204,132 6,204,132 6,204,132 6,204,132


PREF-93/May, 2006/ Rev 1 39

Rs.10/- each

UNAPP. PROFIT/(LOSS)

- (3,727,136) (2,375,596) 2,400,562 7,260,354 12,078,070 36,668,992 61,375,321 79,829,115 96,059,358 114,020,915

6,204,132 2,476,996 3,828,536 8,604,694 13,464,486 18,282,202 42,873,124 67,579,453 86,033,247 102,263,490 120,225,047

LONG TERM LOANS 6,204,132 5,583,719 7,159,770 6,539,356 5,918,943 5,298,530 4,678,117 4,057,704 3,437,290 2,816,877 2,196,464

6,204,132 5,583,719 7,159,770 6,539,356 5,918,943 5,298,530 4,678,117 4,057,704 3,437,290 2,816,877 2,196,464

TOTAL 12,408,264 8,060,715 10,988,306 15,144,050 19,383,429 23,580,732 47,551,240 71,637,156 89,470,537 105,080,367 122,421,511


PREF-93/May, 2006/ Rev 1 40

11.2 Projected Income Statement

Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10

Revenue

Export - 2,754,259 5,730,057 9,149,273 12,580,250 19,462,387 24,260,149 27,725,884 31,179,286 35,171,571

Local 16,692,480 24,788,333 32,470,321 36,597,091 37,740,750 45,412,236 45,054,562 41,588,826 46,768,929 52,757,356

Total Revenue 16,692,480 27,542,592 38,200,378 45,746,364 50,321,000 64,874,622 69,314,711 69,314,711 77,948,215 87,928,927

Operating Expenses 16,977,625 23,202,302 29,689,367 35,204,125 40,574,263 28,794,589 34,335,074 40,411,022 50,657,419 59,480,252

Depreciation 2,278,779 1,865,713 2,511,508 2,567,758 2,232,775 2,638,961 3,750,720 4,469,292 4,533,099 4,470,717

Amortization of Deferred Cost

29,800 29,800 29,800 29,800 29,800 - - - - -

19,286,204 25,097,815 32,230,675 37,801,683 42,836,838 31,433,551 38,085,794 44,880,314 55,190,517 63,950,969

Profit before Tax and Interest (2,593,724) 2,444,777 5,969,702 7,944,681 7,484,162 33,441,072 31,228,916 24,434,397 22,757,698 23,977,958

Interest on Long term Loan 786,374 705,720 625,066 544,413 463,759 383,105 302,451 221,798 141,144 60,490

Interest on short term Loan 263,576 263,576

Profit / (Loss) before Tax (3,643,673) 1,475,482 5,344,636 7,400,268 7,020,403 33,057,967 30,926,465 24,212,599 22,616,554 23,917,467

Taxation 83,462 123,942 568,478 2,540,477 2,202,687 8,467,045 6,220,136 5,758,805 6,386,311 5,955,910

Profit after Tax (3,727,136) 1,351,540 4,776,158 4,859,792 4,817,716 24,590,922 24,706,329 18,453,794 16,230,243 17,961,557

Balance b/f - (3,727,136) (2,375,596) 2,400,562 7,260,354 12,078,070 36,668,992 61,375,321 79,829,115 96,059,358

Retained Earnings (3,727,136) (2,375,596) 2,400,562 7,260,354 12,078,070 36,668,992 61,375,321 79,829,115 96,059,358 114,020,915

Dividend

Cash - - - - - - - - - -

Bonus - - - - - - - - - -

Balance c/f (3,727,136) (2,375,596) 2,400,562 7,260,354 12,078,070 36,668,992 61,375,321 79,829,115 96,059,358 114,020,915


PREF-93/May, 2006/ Rev 1 41

11.3 Projected Cash Flow Statement

YEAR Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10

SOURCES

FROM OPERATION

Profit Before Tax (3,643,673) 1,475,482 5,344,636 7,400,268 7,020,403 33,057,967 30,926,465 24,212,599 22,616,554 23,917,467

Add: Depreciation 2,278,779 1,865,713 2,511,508 2,567,758 2,232,775 2,638,961 3,750,720 4,469,292 4,533,099 4,470,717

Amortization 29,800 29,800 29,800 29,800 29,800 - - - - -

(1,335,094) 3,370,994 7,885,944 9,997,826 9,282,978 35,696,928 34,677,185 28,681,891 27,149,653 28,388,184

OTHER SOURCES

Short Term Borrowings 2,196,464 2,196,464 - - - - - - - -

Sponsor's Loan -

2,196,464 2,196,464 - - - - - - - -

861,370 5,567,458 7,885,944 9,997,826 9,282,978 35,696,928 34,677,185 28,681,891 27,149,653 28,388,184

APPLICATION

Capital Expenditure 0 802,340 4,910,422 2,194,420 1,337,016 5,701,528 6,135,270 5,761,772 5,607,414 4,298,303

Repayments - Long term Loan 620,413 620,413 620,413 620,413 620,413 620,413 620,413 620,413 620,413 620,413

Tax Paid 83,462 123,942 568,478 2,540,477 2,202,687 8,467,045 6,220,136 5,758,805 6,386,311 5,955,910

Repayments - Short Term Loan - 2,196,464

Dividend Paid

- Cash - - - - - - - - - -

703,876 1,546,695 8,295,777 5,355,310 4,160,116 14,788,985 12,975,819 12,140,990 12,614,138 10,874,626

SURPLUS / (DEFICIT) 157,494 4,020,763 (409,833) 4,642,517 5,122,862 20,907,942 21,701,366 16,540,901 14,535,515 17,513,558

INCREASE/(DECREASE) IN WORKING CAPITAL

2,196,464 1,721,482 1,578,855 1,162,385 713,997 2,466,997 868,617 295,483 1,752,031 1,786,619

NET INCREASE/(DECREASE) (2,038,970) 2,299,282 (1,988,689) 3,480,132 4,408,865 18,440,945 20,832,749 16,245,418 12,783,484 15,726,938

OPENING BANK BALANCES 2,196,464 157,494 2,456,776 468,087 3,948,219 8,357,084 26,798,029 47,630,779 63,876,196 76,659,680


PREF-93/May, 2006/ Rev 1 42

CLOSING CASH BALANCE 157,494 2,456,776 468,087 3,948,219 8,357,084 26,798,029 47,630,779 63,876,196 76,659,680 92,386,619

Short Term Running Finance 2,196,464 2,196,464

INTEREST @ 263,576 263,576

WORKING CAPITAL

Increase 2,196,464 1,721,482 1,578,855 1,162,385 713,997 2,466,997 868,617 295,483 1,752,031 1,786,619


PREF-93/May, 2006/ Rev 1 46

1122 AANNNNEEXXUURREESS

12.1 Annexure # 1 Project Cost and Means of Financing

Project Cost

Rupees Rupees

Land

Land considered on Rent -

Project Development cost

Equipment 3,721,300

Furniture & Fixture 2,175,500

Motor Vehicles 4,166,000 10,062,800

Preliminary Expenses

Copy rights-Licensing & Trade Marks 114,000

Other Expenses 35,000 149,000

Working Capital 2,196,464 2,196,464

Intangible Assets

Capital Work in Progress

Interest during Development

Total Assets 12,408,264

Total Capital Employed By:

% Rupees

Equity Contribution by Sponsor 50% 6,204,132

Loan Bank 50% 6,204,132

Total Capital including land 100% 12,408,264


PREF-93/May, 2006/ Rev 1 46

12.2 Annexure # 2 Revenue

No. of days in year 300

Working Hrs. per day 8

Hourly US $ Rate 18

US Dollar Rate 60.00

Increase in Conversion Rate 0%

Inflation 10%

Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10

Technical Staff

Number of Employees 23 23 29 29 29 35 35 35 40 40

Total Hours Worked:

Increase in Employees 23 0 6 0 0 6 0 0 5 0

Increased hrs. 55,200 0 14,400 0 0 14,400 0 0 12,000 0

Average Employed 70% 70% 70% 70% 70% 70% 70% 70% 70% 70%

Increased Hours 38,640 0 10,080 0 0 10,080 0 0 8,400 0

Total Hrs. 38,640 38,640 48,720 53,040 53,040 63,120 67,440 67,440 75,840 79,440

Utilization in Percentage 40% 60% 60% 60% 60% 65% 65% 65% 65% 70%

Hours Used 15,456 23,184 29,232 31,824 31,824 41,028 43,836 43,836 49,296 55,608

Hourly Rate USD $ 18 20 22 24 26 26 26 26 26 26

Revenue in US $ 278,208 459,043 636,673 762,439 838,683 1,081,244 1,155,245 1,155,245 1,299,137 1,465,482

Conversion Rs. Per USD 60 60 60 60 60 60 60 60 60 60

Total Revenue 16,692,480 27,542,592 38,200,378 45,746,364 50,321,000 64,874,622 69,314,711 69,314,711 77,948,215 87,928,927

Export Selling Ratio-Export - 10% 15% 20% 25% 30% 35% 40% 40% 40%

Local 100% 90% 85% 80% 75% 70% 65% 60% 60% 60%

Revenue in Break Up

Export - 2,754,259 5,730,057 9,149,273 12,580,250 19,462,387 24,260,149 27,725,884 31,179,286 35,171,571

Local 16,692,480 24,788,333 32,470,321 36,597,091 37,740,750 45,412,236 45,054,562 41,588,826 46,768,929 52,757,356

Total Revenue 16,692,480 27,542,592 38,200,378 45,746,364 50,321,000 64,874,622 69,314,711 69,314,711 77,948,215 87,928,927


PREF-93/May, 2006/ Rev 1 45

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